Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

LEASE VS. BUY Trask Company is trying to decide whether it should purchase or lease a new automated machine to be used in the production

LEASE VS. BUY

Trask Company is trying to decide whether it should purchase or lease a new automated machine to be used in the production of a new product. If purchased, the new machine would cost $100,000 and would be used for 5 years. The salvage value at the end of the 5 years is: $5,000. The annual operating costs are: $12,000. Annual revenues are estimated at $47,000. The cost of capital is 12%.

-Calculate the Payback Method if the criteria is 5 years, what is the decision?

-Calculate the Accounting Rate of Return if the criteria is 10%, what is the decision?

-Set up a table to calculate the Net Present Value of the purchase option.

-If the machine is leased, the company would need to pay annual lease payments of $20,700. The first lease payment and a deposit of $5,000 are due today. The next 4 lease payments are due in years 1 through 4. The deposit is refundable during the 5th year. A contract to cover all the operating costs will cost $30,000 today and will cover all the maintenance/operating costs during the life of the lease. Annual revenues are estimated at $47,000. The cost of capital is 12%.

-Set up a table to calculate the Net Present Value of the lease option.

-Compare the two options which one would you choose and why?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Handbook Of Fixed Income Securities

Authors: Frank Fabozzi, Steven Mann, Francesco Fabozzi

9th Edition

1260473899, 978-1260473896

More Books

Students also viewed these Finance questions

Question

What has been your desire for leadership in CVS Health?

Answered: 1 week ago

Question

Question 5) Let n = N and Y Answered: 1 week ago

Answered: 1 week ago

Question

1. Define and explain culture and its impact on your communication

Answered: 1 week ago